East EU manufacturing dips as policymakers respond

By Michael Winfrey

Published October 01, 2012

Reuters

PRAGUE – Central European manufacturing shrank in September, signaling a deeper than feared recession in the Czech Republic and a slowdown in Poland that economists said authorities should counter with new stimulus measures.

Economic pain has hit government popularity and sent policymakers scrambling across the European Union's emerging east to stave off the effects of the contraction in the euro zone, the region's main export market and a tenuous anchor of stability for its debt and currencies.

Sliding orders from abroad have stalled exports, the main engine for the Czech and Hungarian economies, and prompted consumers and firms across the region to cut back on shopping and investing.

And in the region's biggest economy, Poland, a collection of dismal new data has spurred Prime Minister Donald Tusk to begin drawing up an economic contingency plan after growth there slowed by almost a third in the second quarter to 2.4 percent.

Poland's Purchasing Managers' Index (PMI) fell for the sixth straight month to a worse-than-expected 47.0 points, the worst result since the depths of the previous economic crisis in July 2009.

In the neighboring Czech Republic, PMI fell to 48.0 in September from 48.7 in August, according to the data released by Markit. It was the sixth month below the 50-point barrier separating expansion from contraction.

In both countries, the declines were driven by weak output and new orders, a factor exacerbated in Poland by the end of a 19 billion euro investment project tied to the Euro 2012 soccer tournament and in the CZech Republic by a two-year government campaign to slash spending and raise taxes.

Economists said it would strengthen arguments for Poland's Monetary Policy Council to cut its main interest rate to 4.5 percent on Wednesday, following a similar move in which the Czech central bank cut its main repo rate to a record low 0.25 percent last week.

But analysts said that with rates already so low, the Czechs could probably benefit now only if the government eased off in its belt-tightening campaign.

"We're calling for a cut in Poland on Wednesday, so this very much supports our view," said Deutsche Bank economist Caroline Grady. "We very much think the Czech problem is fiscal overkill but whether or not they are going to ease back, I don't know. I hope they do."

Hungary's PMI, calculated under different methodology, rose to 52.5 in September, versus a revised 49.6 in August.

EASING, TURMOIL

The data from emerging Europe mirrored the euro zone's worst performance since the nadir of the Great Recession as weakness in debt-choked periphery countries has crept into the bloc's traditionally strongest members Germany and France.

Policymakers are responding, but in different ways. Hungary's central bank defied expectations of high inflation last week and cut interest rates for the second month running.

This fuelled speculation that Prime Minister Viktor Orban, whose popularity has plummeted from over 60 percent in 2010 to around 15 percent now, had deepened his influence at the central bank. Its board is now dominated by policymakers backed by his ruling Fidesz party and sympathetic to a pro-growth push that has often strayed from orthodoxy.

Orban's Polish counterpart Tusk is expected to take action alongside the central bank by laying out a contingency plan next week. Growth seen next year of 2 percent would be an enviable goal for most countries in Europe, but economists say that would feel like backsliding in a country that has enjoyed two decades of uninterrupted expansion.

The downturn has also shaken the government of Czech Prime Minister Petr Necas, who is fighting a back-bench rebellion in his ruling Civic Democrat party against a tax hike bill crucial to the government's 2013 budget consolidation goal.

Necas has shrugged off data showing the country of 10.5 million has likely suffered a fourth quarter of recession from July to September and has tied the tax hike bill to a parliamentary confidence vote in his government at its final reading, probably in November.

Economists said the worsening euro zone outlook meant things would get worse before they improved, and that once growth returned to the region, it would still remain low for some time.

"We still hope it will produce a shallow recession though with a likely long and slow recovery," said HSBC economist Agata Urbanska, in a comment on the Czech data.